How President Obama May Attack the Housing Crisis

Expect the government to get more aggressive in its efforts to prevent foreclosures

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By taking the White House and building on their majorities in Congress, the Democrats are in a great position to move legislation. And since it remains at the heart of the financial mess now threatening to drag the economy into a deep recession, look for the Democrats to make the housing crisis a key part of their agenda for the next Congress.

Just how would the approach to the housing mess change under a Democratic-controlled Washington? Expect the Obama Administration and the Democrats in Congress to get more aggressive in their efforts to keep struggling borrowers in their homes. Here’s an example of one controversial idea that has a much better shot at becoming law in the current political landscape.

Bankruptcy Reform: With the democrats running the government, the odds of bankruptcy judges obtaining the authority to modify distressed home loans on primary residences become significantly better. Democrats have attempted--and failed--to move similar plans in recent months, and Senate Banking Committee Chairman Chris Dodd, a democrat from Connecticut, has recently expressed interest in reviving the proposal. Under such a plan, bankruptcy judges would have several ways to modify mortgages to prevent foreclosures. They could lower the interest rate, extend the payment terms--say, from 30 years to 40--or even approve a reduction in the outstanding loan balance to reflect the current--lower--value of the home, in what’s known as a “cram down.”

The banking industry will be fighting this with brass knuckles and two-by-fours. They argue that such a plan would push mortgage rates higher, as greater compensation would be required for the increased risk that a loan’s original terms would be changed. But with foreclosures mounting, look for the Democrats use bankruptcy reform as a populist vehicle to make good on their campaign promises.